Carmignac Patrimoine: Letter from the Fund Managers

Carmignac Patrimoine A EUR Acc achieved a performance of +7.06% in 2024, compared to an increase of +11.44% for its reference indicator.

In 2024, the United States' economic trajectory diverged markedly from other major global regions. Despite mid-year apprehension, American economic exceptionalism persisted, defying expectations. In stark contrast, European economic momentum deteriorated substantially throughout the year. This transatlantic divide was further exacerbated by political upheaval in both France and Germany. In the first half of 2024, widespread disinflation was observed, leading central banks to feel confident enough by the summer to begin normalizing monetary policy. However, the last mile proved harder than markets anticipated and, outside of Europe, investors pared back their hopes for rate cuts. Meanwhile, in Asia, China's economic activity remained subdued, characterized by declining property values and lacklustre consumer sentiment.

2024 proved to be an exceptional year for financial markets, marked by strong performance across various asset classes. The U.S. stock market delivered robust returns, with major indices reaching new record highs. Three key factors drove market returns: strong corporate profits, easing monetary policy, and enthusiasm towards artificial intelligence (AI) in the first semester and anticipation of Trump 2.0 in the second semester. The AI fervour and other technological innovations led to a significant concentration of market gains in a few mega-cap tech companies, pushing their valuation multiples higher. After a Q1 synchronised rally, European equities lagged behind due to political instability, economic weakness, and limited exposure to AI, underperforming in a year of strong overall equity returns. Emerging market equities, bolstered by a late rally in Chinese stocks and strong results from India and Taiwan, also underperformed their U.S. counterparts.

The fixed income market experienced significant volatility and delivered mixed results, contrary to initial expectations of a strong year driven by anticipated interest rate cuts. European government bonds outperformed U.S. Treasuries as the weaker economic outlook translated into greater confidence in the downward trajectory of interest rates. American exceptionalism was also evident in currency markets, where the dollar outperformed by a wide margin. Strong risk asset performance carried over into fixed income markets, with high-yield bonds emerging as the top-performing sector. Commodities also saw increased investor interest.

The fund's performance throughout the year can be distinctly categorized into two phases. In the first half of the year, our macroeconomic outlook was notably optimistic, particularly regarding the US economy. We anticipated robust growth coupled with a period of disinflation and foresaw a synchronized cycle of monetary easing, though to a lesser extent than the market anticipated. This positive outlook prompted us to maintain a significant exposure to risky assets, such as equities and credit, which ultimately proved to be a successful strategy. Our cautious approach to interest rates also posted positive results. During this period, the fund outperformed its benchmark, driven by strong performance in the technology sector, especially within the semiconductor value chain, as well as by carry strategies in credit and exposure to gold miners.

However, as we moved into the summer, we adopted a more cautious stance regarding the trajectory of disinflation and its potential impact on markets, particularly on risky assets. Consequently, we made two key adjustments to our strategy: reducing our equity exposure to around 35% and lowering the valuations of our convictions within the equity portfolio, with the average P/E ratio dropping from x25 in April to x18 in November while strengthening the quality bias of the portfolio. Unfortunately, these adjustments did not yield the desired results. The second half of the year was characterized by a US exceptionalism trade, notably influenced by Trump's election, which saw a significant rise in cyclical and unprofitable growth stocks. This development negatively impacted the portfolio's relative performance. Despite this, our active management of modified duration, which remained extremely low or even negative, along with a steepening strategy and exposure to inflation, proved beneficial. However, political instability in Europe and unfavourable economic figures weighed on the euro against the dollar, further impacting the fund's relative performance over the year.

As we enter 2025, we are adopting a more selective approach to the US exceptionalism trade. Concerns about inflationary pressures and a significant yield disparity between short and long-term maturities may, over time, prompt investors to question the exceptional valuations of US equity markets. Consequently, we are shifting our focus towards lower-valuation US stocks and diversifying our exposure into Emerging Markets and Europe.

Otherwise, the Federal Reserve's policy shift has led to a reassessment of planned rate cuts for 2025, but it also increases its flexibility to address potential economic challenges during the year. Moreover, given the global increase in national debt and deficits, budgetary constraints will compel central banks (outside the US) to play a crucial role in providing economic support in 2025.

In this environment, we are maintaining exposure to credit, which continues to offer attractive yields and some visibility on potential performance. We remain cautious on sovereign bonds, favouring inflation-linked bonds over nominal rates. We are also transitioning from being negative on US duration to a more neutral position, while still anticipating a steepening of the yield curve, particularly in the United States. The market is currently pricing in fewer than two rate cuts for the entire year. Consequently, US Treasuries can serve as an effective hedge against risky assets in the event of any unexpected macroeconomic deterioration. To enhance the robustness of our portfolio's structure, we have finally implemented various diversification strategies. These include exposure to emerging market local interest rates, gold mining companies, South American currencies, and the Japanese yen.